Banxico’s Carstens Says Emerging-Market Decoupling a Mirage

By Julia Leite and Eric Martin -
Mar 28, 2014

Emerging markets haven’t decoupled
from developed nations and must take steps to protect their
economies from the effects of potential capital withdrawal,
according to Mexican central bank Governor Agustin Carstens.

“The hypothesis of emerging-market economies decoupling
was more a mirage than reality,” Carstens said today in a
speech hosted by the Economic Club of New York. “The main risk
to emerging markets is to be confronted with sudden massive
capital reversals, which so far have not happened.”

The primary challenge for emerging-market economies is
stimulating growth without compromising economic stability amid
worldwide volatility, Carstens said. He urged developing nations
to bolster macroeconomic fundamentals and policies, keep
inflation under control, maintain a strong balance of payments
and keep large international reserves.

“This takes us down the road of structural reforms, which
have huge potential in emerging-market economies,” Carstens
said. “This is the hard way to achieve sustainable GDP growth,
but it is the only reliable one that is left.”

Capital withdrawal may be spurred by developing nations’
own vulnerabilities, such as poor economic management and
current-account imbalances, Carstens said. It could also be
sparked by abrupt changes in monetary policy in advanced
nations, an interruption in the European Union’s economic
recovery, financial-market contagion or rebalancing in investor
portfolios, he said.

While a coordinated policy response between emerging and
advanced economies would be desirable, it doesn’t look feasible
because governments in rich nations need to deal with their own
problems, Carstens said.

Growth Pickup

Mexico’s economic expansion in the first quarter was slower
than expected in part due to bad weather in the U.S., the
country’s main trading partner, according to Carstens.

A pick up in the world’s largest economy combined with
Mexico’s economic overhauls, which include opening the energy
industry to more private investment and encouraging more
competition in telecommunications, can boost potential annual
growth to a level close to 5 percent at the end of President
Enrique Pena Nieto´s administration, he said.

Carstens also said the nation’s tax increase package that
went into effect in January will help diversify the government’s
revenue base away from the energy industry and state-owned oil
producer Petroleos Mexicanos, known as Pemex, which funds about
a third of the federal budget.

“Remember that President George W. Bush used to say ’We
Americans are addicted to oil?’” Carstens said, repeating a
phrase from a 2006 speech by the president. “We Mexicans have
become more addicted.”

Mexico posted a preliminary trade surplus of $976 million
in February, a report showed yesterday, while economists
surveyed by Bloomberg forecast a $200 million deficit. The
economy will grow 3.25 percent in 2014, compared with a 1.1
percent expansion last year, according to the median forecast in
a survey by Bloomberg.